Q&A: EU VAT and reporting compliance
November 2020 | SPECIAL REPORT: CORPORATE TAX
Financier Worldwide Magazine
November 2020 Issue
FW discusses EU VAT and reporting compliance with Alison Birch at Mitchell Charlesworth LLP.
FW: Could you provide an overview of key reporting requirements for companies that are registered for VAT in an EU country? To what extent do VAT reporting rules vary between EU countries?
Birch: All European Union (EU) countries require VAT-registered businesses to file VAT returns, but there are other returns such as European Commission (EC) sales lists and Intrastat declarations for businesses trading with other EU member states. The frequency of the filings differs per country and can be monthly, bi-monthly, quarterly or annually and this can also vary within the same country based on the business turnover or trading style. Some countries also require a supplementary annual return, sometimes with a VAT pre-payment. The format of the returns is also wildly different with some requiring different types of sales and purchases to be separately itemised. Sadly, they are not all nine boxes like the UK. Additionally, some require supplementary filings with transaction-level data.
FW: What key steps do companies need to take to ensure their EU VAT reporting remains compliant with local laws? How can VAT transaction mapping, for example, help to establish all VAT and customs requirements?
Birch: To a certain extent, compliance with local laws depends on a company’s activities, but I would always recommend taking VAT advice before entering into any new jurisdictions or introducing a new income stream because VAT rules will be different based on what is being provided, where it is being provided and who it is being provided to. If VAT is not considered at the outset and factored into timescales and budgets, businesses could find themselves in a difficult situation because VAT registration can take months in some countries and VAT rates vary from 17 to 27 percent, which can impact your profit margin if you are selling VAT inclusive. Transaction and supply chain mapping is therefore vital to understand the VAT and duty impact; even more so considering the many changes due to occur in the next 12 months with Brexit and EU VAT reforms.
FW: Could you outline the kinds of EU VAT-related information companies would typically be required to provide, and how often they might need to provide it?
Birch: Some countries require monthly VAT submissions or payments, so businesses need to be able to determine their VAT position each month in these countries. This requires details of all relevant sales and purchases in the period. If the country in question has a more detailed VAT return, companies will need to be able to break down their sales and purchases between, for example, goods and services, domestic sales and purchases, imports and exports and intra-EU trade. Supplementary filings can also be monthly and if trading in goods, details such as the weight and commodity code are also required. Businesses will have all the information they need – for example, EC sales lists require the EU VAT number of customers, but this should already be held for invoicing purposes – so the challenge is extracting this information in an efficient way by making sure the data is recorded correctly.
“Understanding your supply chain is vital and good data is key to making VAT compliance easier and cheaper.”
FW: What kinds of technology solutions are available to support companies’ EU VAT and reporting compliance efforts? Are you seeing increased awareness and demand for such technology?
Birch: Many EU countries have moved to technology-based filings and there are many tax solutions available to assist businesses with accurate reporting. However, these can be expensive and out of reach for smaller businesses. If the business does not have a local presence in the country of VAT registration with staff that are experienced in how to prepare and submit VAT returns, support will be required. This can be either with a local accountant adviser or a specialist VAT compliance provider. The latter can be more efficient for the business in terms of time and money.
FW: In the event of a VAT inspection by an EU tax authority, how should companies respond initially and throughout the process? How can companies demonstrate compliance and avoid the risk of fines or penalties?
Birch: Each country has its own domestic implementing legislation which allows it to determine the administration of tax. Therefore, invoicing requirements will differ in each country and so will VAT recovery rules. Businesses need to ensure that they are adhering to these rules because some countries will penalise for incorrect invoicing. Penalty regimes differ hugely across the different countries in terms of approach and value. In some countries, taxpayer behaviour is considered and if the business responds promptly, cooperates and acts in good faith, there is scope to reduce or remove the penalty. Other countries have a more automated approach and a penalty or interest is simply applied.
FW: What essential advice would you offer to companies seeking to implement or improve their processes to ensure ongoing compliance with EU VAT reporting obligations?
Birch: Complying with VAT can seem daunting, but it is actually quite a logical tax. Understanding your supply chain is vital and good data is key to making VAT compliance easier and cheaper. If you use accounting software, ensure your tax codes are correct. For example, there may be no VAT on a supply of goods between businesses in different EU member states and also for a supply of a service, but if these have the same tax code you will not easily be able to separate these if the VAT return in one of the countries requires goods and services to be separately identified. Either the business or the VAT return preparer will have to manually review this data, which will cost time or money. As we move to a more digital way of reporting, manual intervention may not be acceptable.
FW: In an increasingly volatile and unpredictable trading environment, do you expect EU tax authorities to increase their monitoring and enforcement of VAT reporting requirements in the months ahead? What trends might we expect to see on this front?
Birch: There are a number of EU VAT reforms being implemented to reduce VAT fraud and level the playing field. These are significant changes in the VAT world, although they mostly impact the supplies to consumers. With the UK no longer following EU principles from January 2021, it is also introducing some of these rules to reduce the risk of fraud. Many countries are also introducing or expanding their domestic reverse charges – to put the VAT responsibility on the business customer rather than the supplier – to reduce the risk of missing trader fraud. It is going to be a period of great change over the next couple of years.
Alison Birch is a VAT partner at Mitchell Charlesworth LLP with 20 years of experience working in practice and industry. She has worked extensively on international VAT matters helping businesses to comply with their VAT obligations globally as they expand to new jurisdictions. She can be contacted on +44 (0)161 817 6100 or by email: alison.birch@mitchellcharlesworth.co.uk.
© Financier Worldwide
Q&A: Effective transfer pricing strategies in the COVID-19 era
Equity compensation and transfer pricing – emerging cross-border issues
Cum-ex: a game of high-stakes musical chairs
Tax liability insurance in Europe: an effective solution for tax uncertainties
The partial employment schemes in the EU and in the UK